Rajoy announced cuts in unemployment benefits and public
wages, signaled reductions in pensions and raised sales taxes as
part of a 65 billion-euro ($80 billion) package of deficit cuts,
risking a deeper recession. As striking miners clamored for aid
to keep their industry alive in a march along Madrid’s main
boulevard, Rajoy trimmed union funding by 20 percent.

Spain’s desperation for foreign capital to sustain public
services and keep its banks afloat has ripped control of policy
from the government, leaving officials to implement the diktats
of markets and the European Union. Preventing a meltdown in the
fourth-biggest euro economy is key for policy makers to limit
risks to the 17-nation currency union.

“We have very little room to choose,” Rajoy told the
national parliament in Madrid. “I pledged to cut taxes and now
I’m raising them. But the circumstances have changed and I have
to adapt to them.”

The measures announced today, Rajoy’s fourth austerity
package in seven months in office, correspond with policy
conditions set out in a draft memorandum governing the 100
billion-euro bank rescue package. European leaders held out the
prospect of buying Spanish debt to trim yields as long as Rajoy
complies with their demands, which include sharing losses with
junior debt holders.

Market Reaction

Demands by bond markets and European creditors that Rajoy
put Spanish finances in order drove him further from campaign
promises that helped him win the biggest majority since 1982.

Rajoy opposed raising value-added tax when the previous
government increased the rate. He denied in a debate he planned
to cut unemployment benefits, which amount to about 30 billion
euros a year. His public support has fallen since his victory on
Nov. 20, and thousands of miners and their supporters set off
fireworks and waved banners in Madrid today after marching to
the capital from northern Spain.

Police Injured

Protesters clashed with police, who fired rubber balls into
the crowd and detained seven demonstrators, said an official at
the Madrid police headquarters, who declined to be identified in
line with policy. Ten police were treated for light injuries by
emergency services, she said.

“There was a small incident and the police charged,”
Justo Rodriguez Braga, general secretary of the Union General de
Trabajadores in Asturias, said in a telephone interview. “There
were various injuries with people bleeding.”

Miners want Rajoy to honor spending agreements made by the
previous government which saw their industry awarded subsidies
that equate to 290,000 euros per miner last year. Direct aid to
companies of 111 million euros this year compared with 301
million in 2011 isn’t enough to keep the industry alive, union
organizer Jose Luis Fernandez Roces said in a July 5 interview.

Police Charges

When the miners last gathered in Madrid in May, police
charged demonstrators with batons and fired rubber balls into
the crowd after a protester shot a firework at the Industry
Ministry using a home-made rocket launcher, Fernandez Roces
said. Last week, a golf ball fired from a similar weapon pierced
the armor of a police van during a clash with authorities in
northern Spain, he added.

The premier also scrapped a mortgage rebate, reversing a
policy he implemented in December at his second Cabinet meeting
to enact an election promise. At the same time, he raised
pensions to meet another pledge. Today, he said he’d present
parliament’s pension committee with a bill to make benefits more
sustainable and address early retirement.

Rajoy also called on the regions to make deeper cuts and
said a new law would limit pay for mayors and the services that
municipalities can offer. The government will create a mechanism
to help regions locked out of markets gain access to financing
in return for deeper budget cuts, he said.

Swelling Deficit

Spain’s central government budget deficit swelled to 3.41
percent of gross domestic product in the first five months of
the year, approaching the full-year goal of 3.5 percent after
the government brought forward transfers to regional
administrations and the social-security system, which is
struggling under the burden of a 25 percent unemployment rate.

Spain won an extra year this week to bring its deficit
within the EU’s 3 percent limit as European finance ministers
agreed to loosen the 2012 deficit goal to 6.3 percent of GDP
from 5.3 percent. Still, ministers urged Spain to step up budget
cuts. EU Economic and Monetary Affairs Commissioner Olli Rehn
said yesterday “additional measures would have to be taken
rather soon.”

Even with the new targets, Spain needs to cut the deficit
by 2.6 percent of GDP as the economy shrinks. The deficit
overshot last year as the economic slump bit into tax revenue
and regions unearthed undeclared bills. The government forecasts
a contraction of 1.7 percent this year and Rajoy said today the
slump would continue next year.